These 71 mutual funds were hit by bond rating downgrades in Sep 2019

These 71 mutual funds suffered bond rating downgrades in Sep 2019

In Sep 2019, 71 mutual funds across 12 categories were hit by bond rating downgrades. At the same time, 12 mutual funds across 4 categories saw rating upgrades. This is a list of both. A bond rating downgrade implies the repaying ability of the bond issuer has weakened in the estimation of rating agencies.

When a downgrade occurs, the value of the bond in the market falls and hence the NAV of the debt mutual fund will also fall in a proportional manner as per its weight in the portfolio. Rating downgrades are a common event in the bond market and investors should be aware of these and not get scared.

The problem arises when the fund manager refuses to sell the downgraded bond (when it is severe enough) or renews the contract with the bond issuer. Often the fund manager may not be able to sell the bond and its weight in the portfolio keeps increasing.

Thus debt mutual fund investors should be aware of credit rating change and associated changes in portfolio weight. Repeated rating downgrades and defaults have spooked debt mutual fund investors. This is a clear sign of an economic slowdown.

While a huge vertical drop in the NAV is a huge shock, there is no need to run scared of debt funds. They remain a much better alternative to risky FDs from small finance banks or co-operative banks. Read moreSmall Finance Bank Deposits: Are they safe? Can I invest? Plus other FAQ and PMC Bank Fraud: Lessons from Sanjay Gulati’s story

With some knowledge of risks and occasional monitoring, debt mutual funds are excellent choices especially for medium and long term investment.  Arbitrage funds also carry significant credit risk and the same precautions should apply to these. Read more Free E-book: A Beginner’s Guide To Investing in Debt Mutual Funds and Understanding Credit Rating Risk in Debt Mutual Funds.

Bond Upgrades in Sep 2019

This is the CRISIL Ratings Scale. Use it to understand rating changes. This is a useful FAQ.

A+ to AA-

Bond issuer: Asirvad Microfinance Pvt Ltd.

Funds holding these bonds

Axis Credit Risk Fund-Reg Credit Risk Fund
Nippon India Credit Risk Fund Credit Risk Fund
Axis Credit Risk Fund-Reg Credit Risk Fund
Mahindra Credit Risk Yojana-Reg Credit Risk Fund
Axis Strategic Bond Fund Medium Duration
Axis Ultra Short Term Fund-Reg Ultra Short Term Fund
Aditya Birla SL Credit Risk Fund-Reg Credit Risk Fund
Nippon India Credit Risk Fund Credit Risk Fund

AA- to AA

Bond Issuer: Manappuram Finance Ltd.

Funds holding these bonds

ICICI Pru Balanced Advantage Fund Balanced Advantage
ICICI Pru Credit Risk Fund Credit Risk Fund
ICICI Pru Medium Term Bond Fund Medium Duration

 

AA-(SO) to AA

Kogta Financial (India) Ltd. bonds held by Sundaram Short Term Credit Risk Fund. SO here stands for a structured obligation.

Bond downgrades in Sep 2019

Indiabulls housing finance bonds dropped from AAA to AA+. Considering its nature of business and present climate, funds holding these should be monitored closely, especially if the bond weight increases.

As many as 46 funds are affected by this, although marginally.

Baroda Treasury Adv Fund(G) Low Duration
Edelweiss Corporate Bond Fund-Reg(G) Corporate Bond
Invesco India Ultra Short Term Fund(G) Ultra Short Term Fund
BNP Paribas Corp Bond Fund(G) Corporate Bond
L&T Credit Risk Fund(G) Credit Risk Fund
Indiabulls Short Term Fund(G) Short Duration
Nippon India Credit Risk Fund(G) Credit Risk Fund
HDFC Floating Rate Debt Fund(G) Floating Rate
Nippon India Strategic Debt Fund(G) Medium Duration
Nippon India Short Term Fund(G) Short Duration
Nippon India Credit Risk Fund(G) Credit Risk Fund
Nippon India Credit Risk Fund(G) Credit Risk Fund
Nippon India Strategic Debt Fund(G) Medium Duration
Aditya Birla SL Regular Savings Fund(G) Conservative Hybrid Fund
Principal Short Term Debt Fund(G) Short Duration
Aditya Birla SL Short Term Opp Fund(G) Short Duration
Nippon India Strategic Debt Fund(G) Medium Duration
Nippon India Credit Risk Fund(G) Credit Risk Fund
UTI Regular Savings Fund-Reg(G) Conservative Hybrid Fund
Nippon India Strategic Debt Fund(G) Medium Duration
Aditya Birla SL Medium Term Plan(G) Medium Duration
Aditya Birla SL Equity Hybrid ’95 Fund(G) Aggressive Hybrid Fund
IDFC Hybrid Equity Fund-Reg(G) Aggressive Hybrid Fund
HDFC Credit Risk Debt Fund-(G) Credit Risk Fund
Canara Rob Savings Fund-Reg(G) Low Duration
Mirae Asset Savings Fund-Reg Savings Plan(G) Low Duration
Axis Credit Risk Fund-Reg(G) Credit Risk Fund
Aditya Birla SL Dynamic Bond Fund-Reg(G) Dynamic Bond
Nippon India Hybrid Bond Fund(G) Conservative Hybrid Fund
Axis Strategic Bond Fund(G) Medium Duration
Aditya Birla SL Equity Hybrid ’95 Fund(G) Aggressive Hybrid Fund
HDFC Corp Bond Fund(G) Corporate Bond
SBI Equity Hybrid Fund-Reg(D) Aggressive Hybrid Fund
L&T Equity Savings Fund-Reg(G) Equity Savings
Nippon India Floating Rate Fund(G) Floating Rate
HDFC Credit Risk Debt Fund-(G) Credit Risk Fund
Aditya Birla SL Low Duration Fund(G) Low Duration
HDFC Corp Bond Fund(G) Corporate Bond
Baroda Credit Risk Fund-A(G) Credit Risk Fund
Nippon India Floating Rate Fund(G) Floating Rate
HDFC Corp Bond Fund(G) Corporate Bond
Aditya Birla SL Equity Hybrid ’95 Fund(G) Aggressive Hybrid Fund
UTI ULIP(G) Dynamic Asset Allocation
UTI Regular Savings Fund-Reg(G) Conservative Hybrid Fund
UTI Hybrid Equity Fund-Reg(G) Aggressive Hybrid Fund
Nippon India Prime Debt Fund(G) Corporate Bond

Reliance Broadcast Network Ltd. bonds dropped from BBB to C and D (default) in one case.

BBB to C: Funds affected

Franklin India ST Income Plan(G) Short Duration
L&T Credit Risk Fund(G) Credit Risk Fund
L&T Low Duration Fund-Reg(G) Low Duration
L&T Credit Risk Fund(G) Credit Risk Fund
Franklin India Corp Debt Fund-A(G) Corporate Bond

BBB to D fund affected L&T Credit Risk Fund(G) but the fund has managed to reduce exposure from almost 2% in Aug 2019 to 0.6% in Sep 2019.

Reliance Home Finance Ltd. C to D 

These are the fund affected but have 1% or less exposure.

Nippon India Strategic Debt Fund(G) Medium Duration
Nippon India Credit Risk Fund(G) Credit Risk Fund
SBI Credit Risk Fund-Reg(G) Credit Risk Fund
SBI Debt Hybrid Fund-Reg(G) Conservative Hybrid Fund
SBI Debt Hybrid Fund-Reg(G) Conservative Hybrid Fund
Nippon India Strategic Debt Fund(G) Medium Duration
SBI Credit Risk Fund-Reg(G) Credit Risk Fund
SBI Equity Hybrid Fund-Reg(D) Aggressive Hybrid Fund
Nippon India Equity Hybrid Fund(G) Aggressive Hybrid Fund
Nippon India Hybrid Bond Fund(G) Conservative Hybrid Fund
Nippon India Equity Savings Fund(G) Equity Savings

Morgan Credits Pvt Ltd. A- to BBB- Would recommend investors exit from Nippon India Ultra Short Duration Fund since it has a high exposure – within brackets.

Nippon India Ultra Short Duration Fund (5.9%) Ultra Short Term Fund
Nippon India Equity Hybrid Fund(3.4%) Aggressive Hybrid Fund
Nippon India Equity Savings Fund(1.5%) Equity Savings
Nippon India Credit Risk Fund(0.5%) Credit Risk Fund

Yes Capital (India) Pvt Ltd. AA to A

Franklin India Low Duration Fund(MD) Low Duration
Franklin India Ultra Short Bond Fund-Super Inst(G) Ultra Short Term Fund

Zee Learn Ltd. AA+(SO) to AA

UTI Credit Risk Fund-Reg(G) Credit Risk Fund
UTI Medium Term Fund-Reg(G) Medium Duration

So far, the increase in exposure accompanying the bond downgrades has only been marginal. However, investors in these funds should keep an eye for news about these bonds and the weight in the portfolio.

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